Vicon Holdings (HKG:3878) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Vicon Holdings (HKG:3878), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Vicon Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = HK$42m ÷ (HK$541m - HK$173m) (Based on the trailing twelve months to September 2020).

So, Vicon Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Construction industry.

See our latest analysis for Vicon Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vicon Holdings' ROCE against it's prior returns. If you're interested in investigating Vicon Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Vicon Holdings' ROCE Trending?

When we looked at the ROCE trend at Vicon Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 42% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Vicon Holdings has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

While returns have fallen for Vicon Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 89% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One final note, you should learn about the 4 warning signs we've spotted with Vicon Holdings (including 1 which is a bit unpleasant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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